Matt Yglesias points to the fact that personal savings as a percentage of disposable income peaked in the early eighties, and attributes the change to "the Age of Reagan". You might as well attribute it to the "Age of Clinton", since that's where the majority of the decline occurred, from 8% to about 2%. In fact, the postwar average was 8-10%; Matt's chart cuts out the lower-saving late 1940s and early 1950s. Reagan/Bush saw a modest decline to the bottom of the average range. Clinton saw a free-fall.
But we don't actually need to attribute talismanic powers to the Oval Office. We have a more parsimonious explanation: the Great Depression generation had (for Americans) unusually high savings rates. US savings peak in the 1970s and early 1980s, when the last of the generation that came of age in the Great Depression hit their peak savings years. Then, as the last of the people who lived through the Great Depression retire, people who have never gone through a financial crisis start saving less and less. What happened at the tail is more pathological, but also hard to attribute to the president. I don't think Clinton made Americans take equity out of their homes or run up credit card debt to buy things.
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If we want to blame an individual, blame Alan Greenspan. Who would put money in a savings account at 2%? Better to put the money in stocks or a house, because (as we all knew) the market eventually always goes up, and housing prices never decline.
"I don't think Clinton made Americans take equity out of their homes or run up credit card debt to buy things."
No, but the tech-and-stock boom of the late 1990's seemed to usher in a tectonic change in the culture. Fueled by the tech boom, millions of people saw their net worth dramatically increase (on paper), and more than a few grew very wealthy indeed if they got in on the ground floor of a hot IPO. The boom triggered a new rush of consumerism. Savings plummeted.
The Clinton administration, unfortunately, did little or nothing about this dynamic in part because the government needed the huge capital gains tax revenues being generated from all the stock market action; in part because the consumerism was purchasing stuff made in China, which in turn enabled the Chinese to buy US debt and thus allow the US government to continue its profligate ways; and in part because no administration wants to be an economic wet blanket.
The tech boom and the Clinton administration's policy toward it were in no way as unsound as the housing boom and the Bush administration's actions. But they were still fundamentally flawed and unsustainable.
Megan,
You are correct in you larger point that we should not attribute everything (or even most things) that happen in the economy to whomever happens to be serving as President at the time. However, I think you've overstated your much smaller point that the decline in savings rates is attributable to demographics. While the retirement of the those who experienced the depression may account for some part of the change in the rate of savings, other changes may account for a larger share of the decline in savings.
In the 1990s, the booming stock market led many to believe a small amount of savings could be made to do what used to require much more savings. When your expectation is your savings will earn passbook rates (4%), you need to set aside a lot of money to accomplish anything meaningful in the future. When your earning expectation changes to 20%+, the amount you need to set aside to accomplish the same goal drops like a rock. Why set aside $10,000 today for your kid's education when $1,000 might be worth much more in only a few short years? Back in the '90s, when I'd run a financial planning projection for my clients using an assumed rate of return of 10%, they'd invariably complain I was being too conservative. If I were to use 10% today, they'd complain I was being too optimistic. Couldn't such changes in earning assumptions alter savings rates? Such changes have certainly altered my clients' spending habits.
Another change in the economy that might have had some impact on savings rates has to do with the ease in credit. Back when I bought my first car, I was expected to have a fairly large down payment. The same was true with my first house. This required me to save up to buy my first car and to buy my first house. As it became much more common for cars and houses to be bought with virtually no down payment, the need to save declined. Wouldn't these changes in the credit markets affect the savings rate? (And, since some of these changes were the result of government policy, wouldn't it be fair to attribute them to some extent to the President?)
David Walser's comment about easier credit is quite astute. Easy credit has done a lot to lessen savings, for the simple reason that it's easier to spend money - eve money we don't have.
Until the 70s revolving line of credit cards were virtually non existent. You had "charge" cards. You were expected to pay the balance with every monthly bill. Those charge cards were held by only a small minority of the population. Today, even low wage earners may have multiple line of credit cards.
For most purchases, except really big ones like cars and houses, you paid in cash. If you didn't have the cash, you did not buy. In fact it was even harder to get your hands on that cash. The banks were open 5 days a week from 9 to 3, with possibly 1 night till 8. If you didn't et to the bank - no cash. Today, you just go to a cash machine to get your money.
One other minor point was that car leasing was also virtually non existent. When it became more common, people found that they could drive a fancier car for a monthly payment equal to paying the loan on a lesser car. Of course, like renting an apartment, you'd never get any equity in the car and, at the end of the lease, start a whole new cycle of monthly payments.
The easing of credit made it possible for people to not only SPEND money, but accumulate large interest payments. With that, savings go down.
No need to illustrate this one with a photo of Bill Clinton.
Thanks in advance!
What's the deal with the Flickr photos? I think they're nice, but I'm curious about their use. Can any publication take one or more of my Flickr photos and use them under "fair use"? Does the Atlantic or Ms. McArdle contact the Flickr user in advance to ask permission?
I'm using photos that are licensed for commerical use with attribution
Cool! Thanks for the quick reply.
Let me know if you need photos of adorable little girls. I'd be happy to license my daughters' images to the Atlantic cheap!
The effects of the 1970s Great Inflation destroyed the ethic of savings. It changed people's mindset.....Buy Now before the price rises. Then came along the easy credit a decade later which cemented that behavior.
"Matt Yglesias..."
Why are we still reading and commenting on Matt Yglesias's thoughts on the economy and and not on John Hussman's? What, other than your personal acquaintance with Yglesias, explains this?
"...points to the fact that..."
They didn't assign The Elements of Style to English majors at Penn? From the book:
To be fair, if memory serves, E.B. White later conceded that this egregious phrase is occasionally unavoidable, but it wasn't in this case. You could have replaced points to the fact with notes.
The next time Matt Yglesias impresses me with an analysis of data will be the first time. Why do people take this guy seriously?
You realize Matt's commenters say the exact same thing about Megan every time he links to her, right?
Hardly surprising considering their poor reading habits.:~)
Yeah, I'm sure. But there's wrong analysis, then there's simply attributing trends you don't like to people you don't like (debt, Reagan). Megan's analysis looks at what some likely causes are, there aren't "nefarious actors" that cause all the world's ills.....etc. She cited generational differences, which is so much more sensible.
Also, she has an MBA and knows a lot more about business/econ than I do. Matt's got a Harvard degree and is clearly smart enough, but what exceptional knowledge does he have that should make me pay attention? For example, his idea to tax all income past $10Mill at 90% was beyond ludicrous. He was a philosophy major (acc. to wikipedia). I'm not convinced he's ever done serious numerical data analysis.
The concept of "savings" is partially an illusion at the macro level anyway. It takes real people and assets to produce goods. If the masses saved as much money as they could, it would cause deflation in the short term because they are chasing dollars instead of buying what others are producing. If the masses retired at the same time, it would cause massive inflation destroying "saved" wealth because fewer goods are being produced while demand increases.
Personally, I'm blaming everything bad on Obama, using the liberal nonsense that I got with Bush blamings for 8 years.
I don't mean to nitpick, but the decline under Reagan was from 10% to 6%, and under Clinton from 6% to a bit under 2%. Apparently Matt Yglesias misreads graphs to support his political inclinations, and Megan McArdle misreads graphs in her eagerness to denounce Yglesias' misreadings.
Megan may be right about her larger point, but whenever one reads
a) use of hyperbolic language to describe a graph that you can click and see for yourself, as in the first quote;
b) simplistic arguments about Clinton impossibility of making Americans do things, ignoring, in a blog about economics, the impact of economic policy in consumption and investment;
one tends to take the rest of the posts, the ones a layman knows nothing about, with a grain of salt.
Anyway, somebody who doesn't know when the successive administrations took office would probably interpret the graph as a decline in savings that began in the early 80's and continued until the present recession.
Actually, savings as a percent of disposable income did decline from 10% to 8% under Reagan, but did a detour to 12+% in 1982-83.
See here.
And the decline under Clinton was from 8% to 2%.
Ward, follow the vertical January lines.
Reagan/Bush - follow the lines of January 81 and 93. 10%-6%
Actually, it seems to drops to a little little under 6% in January.
Clinton - Follow the line From January 93 to January 2001. 6%-2%. Again, a little under 2%.
This isn't that hard, really.
There's a 2 percentage point drop at January '93, so whether it was 8% or 6% is somewhat ambiguous. Even if the savings rate was 6% in January 1993, that means that saving fell by 2/3 in the Clinton administration.
Not that its "Bill's fault". Plenty of things happen all the time that have nothing to do with the President.
When in doubt, check the tax code.
The housing boom was kicked off by exempting from tax the first half-million in capital gains on the sale of your primary residence, which happened under Clinton.
This allowed lots of people to retire a few years early and start drawing down their savings, by allowing them to sell their house tax-free before they turned 65.
It also gave people moving up in the housing market more money to bid for houses, putting upward pressure on house prices, and making first-time buyers (and people moving from a house which hadn't increased much in value) take on more debt to buy the same house.
It also drew more money into the housing market as a whole, but "investment" in home equity is not considered "savings". (Is any investment considered savings? I'm too lazy to dig into the data.)
Yglesias misses something else interesting: savings rates rise during recessions and slowly fall during good times. The "Age of Reagan" - when conservatives generally set fiscal policy - were generally good times economically, and people felt less need to prepare for bad economic times. So more proof that the Reagan presidency was good for people.
While I agree it's always good to look at the tax code for hidden incentives that may account for behavior, in this case, I don't think the tax code offers much of an explanation for the housing bubble. The $500,000 exclusion for gains on the sale of a principal residence replaced another provision (the ability to defer gains indefinitely if the sales proceeds were invested into another home) that, for most taxpayers, had a higher present value. The ability to deduct interest and tax expenses associated with home ownership, undoubtedly inflates home prices somewhat -- but these provisions have been in the tax code in one form or another for generations.
No, the changes in government policies that had the most to do with the housing bubble were those changes designed to make it easier to borrow to buy (and to use the equity in) a home. Members of both political parties thought home ownership was a good in and of itself. They tried many different things to get banks and others to lend to home buyers more aggressively. Easy credit led to inflated home prices much more than the tax benefits bestowed on home owners.
Isn't private savings, and not personal savings, the more meaningful value to consider? As I understand it, if a corporation distributes dividends to its shareholders and the shareholders personally reinvest them, that counts as personal savings, but if the corporation retains earnings, that counts as private savings but not personal savings. If this is correct, then looking only at personal savings can be misleading.
Megan and all,
As I think of it, "The Age of Reagan" started with Reagan's presidency and lasted through GW Bush's. As a transformational President, Reagan ushered in a decidedly more conservative politics in our country. This clearly lasted through Clinton's presidency. Two illustrative examples:
1) the Republicans' steady gains in the Congress culminating in the 1994 "takeover", and
2) the fact that many of Clinton and the New Democrats principles were conservative ideas, repackaged with a liberal patina -- welfare reform, free trade, etc.
So, when Matt refers to the "Age of Reagan", he's giving Reagan his proper credit for being the defining politician of that age. Embrace the positives (there were many) of the philosophy that drove our country's political and cultural direction throughout the 80s and 90s, but acknowledge the tradeoffs.